Card Payments Review Creates Big ROI and Little Investment ALi Lincoln Electric ti Case Study &P Panel ldiscussioni Aaron Bills / COO / 3Delta Systems Ed Henry / Director, Finance Operations / Thermo Fisher Scientific NACHA Payments 2010 Tuesday, April 27 Room 607 10:00 11:15 AM
An Analytical Approach Helps Achieve Big ROI with Little Investment Case Study: A manufacturing company, Lincoln Electric, achieved cost improvement in three areas through the use of Six Sigma Business Improvement Processes applied to its collections cycle 1. Card processing fee reductions through interchange management 2. Operational cost savings through technology improvement 3. Data security and corporate risk/liability reduction through outsourcing
Case Study: Lincoln Electric Company Company is a full-line manufacturer and re-seller of welding and cutting products Welding products include arc welding power sources, wire feeding systems, robotic welding packages, fume extraction equipment, consumable electrodes and fluxes. The Company s welding product offering also includes regulators and torches used in oxy-fuel welding and cutting. Leading global position in the brazing and soldering alloys market
Analytical Methodology: 6σ-Six Sigma Overview Six Sigma is a business management strategy seeking to identify and remove the causes of defects/errors in manufacturing and business processes. It asserts: Continuous efforts to achieve stable and predictable process results (i.e. reduce process variation) are of vital importance to business success Manufacturing and business processes have characteristics that can be measured, analyzed, improved and controlled Achieving sustained quality improvement requires commitment from the entire organization, particularly from top-level management Features that are emphasized in Six Sigma include: Focus on achieving measurable and quantifiable financial returns from any Six Sigma project Emphasis on strong management leadership and support Commitment to making decisions on the basis of verifiable data, rather than assumptions and guesswork
6σ: Six Sigma Methodology Define high-level project goals and the current process Measure key aspects of current process and collect relevant data Analyze the data to verify cause-and-effect relationships Determine the relationships and attempt to ensure that all factors have been considered Improve or optimize the process based upon data analysis Control to ensure any deviations from target are corrected before they result in defects Set up pilot runs to establish process capability, move on to production, pp p p y p set up control mechanisms and continuously monitor the process
Case Study: Lincoln Electric Key Metrics 2008 Sales: $2.48 Billion North America: $1.45 Billion Net Income: $212 million (8.5%) Accounts receivable days decreased to 55.0 days at December 31, 2008 from 56.9 days at December 31, 2007
Define: Problem Statement - the Beginnings Card processing began as a small portion of the business Exception oriented 2005: $18mm 2006: $46mm 2008: $8-10mm per MONTH (approx. 6% of NA Revenue) Pareto Analysis: Data driven analysis 26% of customers using cards drove 90% of volume Very focused users Business acquisitions had a range of mixed technology and different bank providers 2006 Problem: IF transaction processing fees could be reduced to 2006 Problem: IF transaction processing fees could be reduced to 1.6%, company could save $500,000.
Measure: Develop a Baseline for Payment Terms Reviewed fees: 2.7% average (blend of V/MC/AX) Senior management initial reaction was: Call clients and tell them no more cards Payment terms: Customers paying 32 days average (DSO) then using card and gaining additional float on their side 32 DSO is average of US portfolio Thus, effective discount: 3% 30 But, customers say, We want to use the cards. Secondary Problem: Ho to gain benefit of orking capital impro ement for card How to gain benefit of working capital improvement for card transactions
Analyze: Study the Situation Credit Research Foundation: 93% of companies accepted cards for past due payments No fees charged to recoup bank fees 97% found this helped with preference issues with bankruptcies Lincoln Customer Analysis: 3% customer use increased from 2005 2006 5-6% of customers pay with cards overall Value has been stable through 2008 However, the dollar value from these clients has increased greatly Larger ticket sizes More comprehensive use High average ticket
Analyze: Review Found More Details Card fee structure was not clear Lack of information / clarity from then-current provider Structure of Interchange fees Difference between consumer and commercial transactions Gained awareness of Level-3 rates for B2B (Level-3 is equivalent to invoice line item detail data processed with the card transaction) Large ticket reduced fee programs Also discovered there was more to the situation Technology and service options Old technology ogy and resulting cost and service issues Security issues PCI outsourced/hosted options versus distributed software Operations improvement possibilities Auto cash application/reporting options
2005 Annual Interchange Report Association for Financial Professionals* Methods Used to Reduce Costs of Accepting Credit Cards Negotiate for lower fees with industry group 56% Restrict consumer choice to certain cards 30% Request unbundled pricing 29% Choice of POS equipment 19% Offer co-branded or private label card 13% Offer gift/stored value cards 14% * http://www.afponline.org/pub/pdf/interchangesurvey.pdf
Things to Know: Card Types Vary Based on Customer B2C (Business to Consumer): Business selling to individual consumers Consumer credit and charge cards Rewards cards B2B (Business to Business): Business selling to another business Corporate purchasing cards Business cards B2G (Business to Government): Businesses selling to Federal, State or Local Government organizations (includes others like utilities or universities) Corporate purchasing cards GSA SmartPay Federal Purchasing Card
Analyze - B2B Example: Processing Fees Vary Greatly B2B Corporate Cards 2009 MasterCard Interchange Fee* Corp Standard 2.95% + $0.10 Data Rate I 2.65% + $0.10 Data Rate II 2.40% + $0.10 Data Rate III (P-Card Level-3) 1.80% + $0.10 Face-to-Face 2.40% + $0.10 Large Ticket 1.25% + $40.00 * http://www.mastercard.com/us/merchant/support/interchange_rates.html
Analyze - B2B Example: Processing Fees Vary Greatly B2B Corporate Cards 2009 Visa Interchange Fee* Commercial Standard: 2.95% + $0.10 Purchase Card, CNP Qual: 2.55% + $0.10 Purchase Card, Level-2: 2.05% + $0.10 Purchase Card, Level-3: 1.80% + $0.10 Purchase Card Large Ticket: 0.95% + $35 Proper qualificationofof interchange can save a significant amount of money. * http://usa.visa.com/merchants/operations/interchange_rates.html
Improve: Manage and Create Win-Win With Customers Hypothesis - Can it be managed with payment terms? If client uses card, then N15 or N30 with check Working capital improvement implications very favorable Removes about half a day for overall portfolio Incremental $3mm/month cash flow Receivables: With $125mm/month total, ability to reduce $3mm is significant 64% reduction in DSO for client grouping
Total Cost of Acquisition (TCA): Preparing for the Process Review Lowest TCA from the merchant acquirer Interchange qualification expectations Acquirer fees/margin (the Discount Rate) Processing fees Transactional Monthly service fees Downgrades / surcharges Lowest TCA for operations Reconciliation and cash application (net of fees or lump sum) Turnover and training Management reporting Access control (refund limitation, etc.) System support costs Make the decision based on lowest total cost of acquisition (TCA) not price. There are many variables that can impact cost a lowest discount rate may be your highest total cost.
Total Cost of Acquisition (TCA): Preparing for the Process Review Lowest TCA from the payment system interface provider (Terminal, Virtual POS, Distributed Software, etc.) Usage price Software licensing fees/terminal purchase cost/monthly subscription Ongoing software maintenance costs Dedicated equipment: PC or Servers Communication costs: Dial/Frame Relay costs/internet Support and personnel costs Database/software maintenance and updates (patches, updates) Incremental security countermeasures and audit requirements Application Service Provider (ASP) models have significant advantage Fully hosted applications Centralized support and administration Rapid deployment
Improve: Supplier Selection and Implementation Lincoln Electric choice of technology provider driven by Level-3 card processing capability Business expertise PCI compliance Responsiveness Web based Software as a Service (SaaS) model Deployment and support advantage Options for growth/technology h migration path Future initiatives driving Lincoln s Web technology
Improve: Primary and Secondary Benefits Process improvements across all US entities Weld school (books, class fees, apparel) Tradeshow use, etc. Consolidate and automate via Web Automated receipt produced Old system very laborious Unexpected improvements not specifically in scope, but very favorable Reporting and multi-user traceability
Improve: Case Study Results Initial implementation ( Pilot Run ) Baseline interchange fee reduction from 2.7% to 1.4% Direct interchange savings $1.4mm in 2008 DSO on card customers are 19 days in aggregate Further results possible Expanded use New applications Online
Control: Reporting Tools Provide Verification Improved results and insight into the card types and qualification rates Monitor and control function Reporting tool is key Access controlled by user permissions Support financial control requirements Real-time custom and standard reports Downloadable in Excel (CSV) formats What customers are using what types of cards Enables proactive outreach to clients
Continual Progress: Next steps Automatic ti cash application Enabled by rich detailed data combined with ACH deposit Web-delivered shopping carts without security issues Data tokenization option no locally stored card data Reduces corporate risk/liability and PCI compliance costs Once the right partners are aligned, many more opportunities g p g y pp unfold
Final Observations B2B market continues to grow and expand Ability to steer clients to N15 with card model Competitive fees are essential Observation: Many merchants just sign a convenient program when volumes are small without t any real research and pay significantly later as scale occurs Card acceptance is a complex environment, so it s important to partner up carefully
Case Study Panel Discussion
Your Presenters 3Delta Systems, Inc. Aaron Bills Chief Operating Officer & Founder abills@3dsi.com 703-234-6011 www.3dsi.com Thermo Fisher Scientific Ed Henry Director, Finance Operations edward.henry@thermofisher.com 412-490-8307 www.thermofisher.com * Case Study framework courtesy of Lincoln Electric Tony Zalar Director Collections & Case Study framework courtesy of Lincoln Electric, Tony Zalar Director, Collections & Customer Service; Tony_Zalar@lincolnelectric.com; 216-383-2436; www.lincolnelectric.com